Taxation Of Pension Accrual

 

Members of the Scheme could be taxed on the value of pension they earn each year if it exceeds certain thresholds.  This could affect any member, but it is most likely to hit high earners, those who have had significant pay rises or those who have accessed funds in another pension scheme under the 'Pensions Freedom' legislation. 

For further information on the Annual Allowance and Lifetime Allowance please click here​​ to ​access the latest rates. 

​As the new rules are very complex, and as they relate to individual tax positions, it is not possible for Willis Towers Watson to definitely predict who will be and who will not be affected.  Nor can Willis Towers Watson provide individual tax advice.  Whilst this page is intended to be helpful you must take your own independent advice to establish whether (and to what extent) you are affected.

If you do not have a financial adviser, you can locate one in your area by visiting:  www.unbiased.co.uk​

The rules impact on all pension schemes, but this page is specifically aimed at members of the Scheme.

Which parts of your Willis Pension does this affect, and in what years does it count?

The Willis Pension Scheme has two sections

• The Main Section – the “final salary” part
• The Additional Voluntary Contribution Section – the AVC scheme.

All members are earning benefits in the Main Section, however, only some members are also contributing to the AVC Section as well, so this may or may not affect you.

members should have considered the Main Section benefit they earned over the Calendar year 2014, for the tax year 2014/15, as this is the tax year containing 31 December 2014.

In addition it was necessary to consider any AVC  benefit earned over the tax year 2014/15 from the AVC Section of the Scheme. 

It was the sum of these two parts that is compared with the Annual Allowance of £40,000 – you don’t get two lots. 

From 8 July 2015, all Schemes and sections are to be measured against tax years, with special arrangements for the transition year of 2015/16.

How is the year 2015/16 Tax Year dealt with?

Pension Input Periods are being aligned with tax years with effect from 8 July.  This is being done by splitting the tax years into two “mini” tax years.

Defined Benefit Accrual from 1 January 2015 to 8 July 2015 plus AVCs from 6 April 2015 to 8 July 2015 are declarable in the pre- alignment mini tax year

Defined Benefit Accrual from 9 July 2015 to 5 April 2016 plus AVCs from 9 July 2015 to 5 April 2016 are declarable in the post – alignment mini tax year.

An Allowance of £80,000 is available in the pre-alignment mini tax year.  You can also use any previously unused allowances from 2012/13, 2013/14 and 2014/15.

There is no additional allowance for the post alignment mini tax year, but you can carry forward up to £40,000 from the pre alignment mini tax year.  You can also use any allowances that are still unused from 2012/13, 2013/14 and 2014/15 – if you didn’t use them in the pre–alignment tax year.

Going forward, the “usual” rules for carry forward apply, but the only part of the original 2015/16 allowance that is ever available for carry forward is anything that was initially carried forward from the pre - alignment tax year to the post - alignment tax year – i.e. a maximum of £40,000.

How is Pension valued in the AVC Section?

This is fairly simple; it is the value of all the contributions made to the AVC Section over the period in question.  Note: the standard 10% that all members pay does not count towards this calculation.

How is Pension valued in the Main Section?

This can get very complex as the calculation does not relate to contributions paid either by the member or by the Company. Instead, it depends on the build-up of benefits between two pension input periods.

You can get a very rough idea of the amounts involved as follows:

1. Take the "accrued benefit" at the beginning of the year
2. Increase it by the allowed inflation. For the year 2014 this will be 2.7%
3. Subtract this from the "accrued benefit" at the end of the year
4. Multiply the answer by 16

Note that the starting point of “accrued benefit”, in this situation, is a complex calculation calculated according to rules set by the Inland Revenue. Although it is a bit like the benefit members would be given if they left service on that date, it is not the same. This is particularly the case in a Scheme like the Willis Scheme which has a very complicated benefit structure.

Although members can estimate their figures using the leaving service benefits shown on the annual benefit statements, such an estimate may differ greatly from the final figure.  This is particularly the case for:

• members with split normal retirement ages (some benefits drawable unreduced at 60, some at 65). This includes members in the Senior Sections and members affected by the Barber Judgement.
• members with bridging pensions
• members in late retirement
• members who expect their benefits at normal retirement age to be capped at 2/3rds

How can I find out what these values are?

If your total Pension Input Amount exceeds £40,000 in tax year 2014/15 or later we will write to you automatically before 6 October following the tax year end.

Other Associates may request statements of Pension Input Amounts, but these will only be available after the end of the Pension Input Period. Contact pensions@willistowerswatson.com for more info.

What happens if I don’t use all my Annual Allowance?

There are rules allowing carry forward of unused allowances. You can carry forward unused allowances from up to three years ago, but it was even possible to do this in the 2011/12 tax year if you recalculate historic year’s pension accrual as if the new rules had applied then. We recommend speaking to a financial adviser to ascertain whether you have any remaining annual allowance.

What are “Pension Freedoms” and how does it affect my Allowance?

When Pension Freedom was introduced in 2015, it was then possible to either take out some or all of the funds as a lump sum (75% of which would be taxable) and leave the rest invested.  Alternatively, members can “crystallise” the whole fund, take out 25% tax free leaving the rest invested and draw a regular income from that investment fund going forward. 

If a member of the Willis Pension Scheme has a Money Purchase/Defined Contribution scheme either personally or from a previous employer, and then accesses that scheme using the Pensions Freedom legislation, an additional restriction will come into force and actively affect the contribution limits for every future year. This is called the Money Purchase Annual Allowance and until 2017/2018, this limit was £10,000. Associates who contribute more than £10,000 a year to Money Purchase arrangements (such as the Willis Pension Scheme Additional Voluntary Contribution arrangement) will pay tax on the excess as if they had breach the Annual Allowance. From September 2017, the government confirmed that this MPAA will be further reduced to £4,000, effective as of April 2017. Please note that you should’ve been provided with a Money Purchase Annual Allowance Trigger Notification from the Pension Scheme where you first accessed your pension flexibly, and you should use this to inform all your other Pension Schemes that you are subject to this reduced Annual Allowance.

The ordinary Annual Allowance of (usually) £40,000 will still apply as well, but affects Defined Benefit and Defined Contribution Schemes differently. Special arrangements mean that extra tax is not payable twice on the same saving if both Allowances are exceeded. Again, we recommend speaking to financial adviser if you are at all unsure.

Am I likely to be affected?

People who are most likely to be affected are those who have pay rises in excess of the inflation adjustment (2.7% this year) that are pensionable and who have longish service in the scheme.

However, this is not an absolute guarantee.  A few members with very high salaries and short service may be affected.  Occasionally those with good pay rises in previous years may find that they are affected, because the definition of final pensionable salary is an average over one or two years which may still be affected in later years.

How is the tax calculated?

Marginal rate applies to the excess of the accrued value in the year over the Annual Allowance and unused allowances over the previous three years.

So if you accrue £80,000 of final salary benefits and £5,000 of AVCs, and have £15,000 of unused allowances from the previous three years, and a marginal tax rate of 40%, the tax incurred (assuming a standard annual allowance of £40,000) will be:

Annual Allowance = £40,000.00

            Contributions in tax year = £80,000.00 DB + £5,000.00 DC contribution.

            Carry forward amount = £15,000.00

            Contributions over Annual Allowance = (£80,000 + £5,000) – (£40,000 + £15,000) = £30,000.